Should Fannie, Freddie Do More to Go After ‘Strategic’ Defaulters?

Fannie Mae and Freddie Mac haven’t been able to recoup much money from people who intentionally default on their mortgage loans, a federal audit has found.

The inspector general for the Federal Housing Finance Agency, which regulates the two government-controlled mortgage finance giants, said in a report Wednesday that Fannie and Freddie recovered less than $5 million from borrowers pursued for “deficiency judgments” last year.

The report criticized the housing regulator for not doing enough to focus on the issue. As a result, Fannie and Freddie “may not fully realize their recovery potential or ensure that they are meeting their obligations to mitigate losses using all available tools,” the report said.

Through pursing those cases, Fannie and Freddie try to recover mortgage debt that borrowers still owe — even after losing their homes to foreclosure. The two firms pursued 35,000 of those cases in 2011. But they only recovered $4.7 million, or about 0.2% of the $2.1 billion owed, the report said.

The report the number of borrowers who bought vacation homes or investment properties and defaulted intentionally “appears to be significant.”

Fannie and Freddie’s policies for these deficiency judgments differ, with Fannie pursuing them in 38 states and Freddie pursuing them in 17, the report said.

While Fannie has developed a method to find potential strategic defaulters and used outside vendors to pursue collections, Freddie Mac has not done so, the report said. In addition, both Fannie and Freddie prevent borrowers from getting a new loan for seven years if they strategically default.

In response, the housing regulator agreed to study the issue, but noted that it is difficult to determine when the likelihood of recovering money will justify the cost of doing so.

“While there is value in estimating and maximizing post foreclosure recoveries, the agency’s primary focus has been to work to reduce the volume and value of foreclosure losses,” the FHFA said in its official response to the report. Fannie and Freddie declined to comment.